Oil: Into New Frontiers

"The most dynamic companies hold the key to these new hard-to-get reserves."

At least one positive development has resulted from the sharp rise in oil prices of recent years. The influx of capital to oil companies from high prices, combined with expectations that prices are unlikely to fall very far, has boosted investment in oil exploration and production, especially in what the industry terms "frontier" areas—namely enhanced oil recovery (more oil from existing fields), the deep (or ultra-deep) water and the Arctic. Massive new reserves have been identified, proven up, and brought to production—whilst reserves previously considered impossible to reach are now no more than a horizontal drilling or steam injection technique away. All this should help ensure supply can meet global demand for far longer than was expected.

Most newly-discovered deposits avoid the risks and cartel policies that constrain production in the world's largest proven deposits, many of which lie in countries controlled by OPEC or national oil companies in Asia and Russia. It is the most dynamic companies that hold the key to these new hard-to-get reserves.

All this should be good news for oil consumers—including producers—because, although high oil prices are as important to oil companies as they are to OPEC budgets, these companies operate in a competitive market—ensuring market mechanisms work to respond to high prices and increased demand.

James Burkhard, a managing director at energy consultancy IHS CERA, says the recent upstream developments mean oil and gas will continue to be pillars of global energy supply for decades to come. "The competitiveness of oil and gas and the scale at which they are produced mean that there are no readily available substitutes in either one year or 20 years," he added. Oil demand is forecast to grow to 99Mbpd in 2035, up from 84Mbpd in 2009, according to the IEA.